The MV “Toisa Pisces” (“Vessel”) suffered a series of machinery breakdowns and was placed off-hire for substantial periods. The “loss of hire” insurers refused to pay out and Owners sued. Insurers were held liable at first instance and on appeal. The High Court clarified that “want of due diligence” refers to negligence. Both Courts decided that no credit should be given to insurers for time/cost saved by executing unrelated repairs and surveys concurrently with the repairs arising from the insured event. The causative effect of the first breakdown was found to persist into the off-hire periods arising after subsequent breakdowns.

This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), an advocate and solicitor of the Singapore Bar

Background

The Vessel is an oil production and storage unit capable of dynamic positioning, i.e. automatically maintaining its position above a wellhead. Owners chartered the Vessel to Pemex and took out ‘loss of hire’ insurance. The insurance responded to events covered by the Vessel’s Hull & Machinery policy. The insured sum was US$70,000 per day up to 30 days, with an excess of 21 days.

A series of machinery breakdowns occurred and the Vessel was placed off-hire for multiple periods. First, a port motor failed. An existing starboard motor was swapped to the port side and a spare starboard motor was installed. At the same time, maintenance work was undertaken. Secondly, the maintenance work unfortunately caused a subsequent hydraulics failure, which necessitated dry-docking. Owners carried out unrelated repairs and surveys during dry-docking. Thirdly, shortly after the Vessel was finally redeployed after repairs and surveys, a starboard motor failed.

Insurers refused to pay the claim of US$2,100,000. Insurers sought to avoid the policy by alleging (a) material non-disclosure/misrepresentation and (b) want of due diligence. Insurers further alleged that (c) credit should be given for the time saved by Owners carrying out unrelated repairs and surveys during dry-docking and (d) the off-hire periods resulting from the three breakdowns should be considered separately, that is, the 21-day excess should apply to each off-hire period.

Insurers were found liable at first instance and before the Court of Appeal.

Judgment

Material non-disclosure / misrepresentation

When the policy was placed, insurers were told that (i) there had been one previous hull claim on the Vessel, (ii) there had been no significant off-hire period, and (iii) the Vessel had an “excellent hull record” and “no major business interruption”. There had actually been two previous hull claims and a previous 10-day off-hire period. Also, a design fault in the engines known to Owners was not disclosed.

Having examined the facts in detail, Blair J found that these matters were not material and in any case would not have induced the insurers to reject writing the risk. In particular, the 10-day off-hire period was immaterial because it was short (much shorter than the 21-day excess), occurred four years before the policy was placed, and did not result in a claim.

On appeal, material non-disclosure/misrepresentation was not in issue.

Want of due diligence

Insurers alleged that if Owners had exercised due diligence after discovering the design fault in the engines, further modification works would have been executed and the relevant breakdown avoided.

Blair J decided that “want of due diligence” referred to a lack of reasonable care (that is, negligence) by the assured itself and not recklessness. In doing so, he followed the Canadian decision of Secunda Marine Services v Liberty Mutual (2006) NSCA 82.

No negligence was found on the facts. On appeal, want of due diligence was not in issue.

Credit for time saved

Insurers argued that as the Vessel would have been placed off-hire anyway when Owners carried out the unrelated repairs and surveys, Owners had not actually suffered any loss of hire from the machinery breakdowns and to pay out on the policy would be to give Owners a windfall.

Blair J applied The Ferdinand Retzlaff [1972] 2 Lloyds Rep 120 and decided that no credit had to be given if the Owners’ unrelated repairs did not increase the cost or time that would have been incurred in any case as a result of the event in question. If Owners’ unrelated repairs increased the cost or time incurred, Owners’ claim would be restricted to the cost or time that would have been incurred in any case.

The Court of Appeal applied the plain words of the policy to reach the same result. The policy responded once “the Vessel is prevented from earning hire for a period in excess of [21] days in respect of any accident”. It did not mention ultimate net loss or giving credit for time subsequently saved by concurrently conducting unrelated repairs and surveys. In other words, once the Vessel went off-hire for more than 21 days, payout under the policy was determined by a matter of “simple chronology”. The Court of Appeal also held that there was no basis to read into the policy a requirement to give credit for time subsequently saved, partly because of the complexities such a construction of the policy would engender in application.

Aggregation of off-hire periods/causation

Insurers argued that the three machinery breakdowns were separate occurrences and in particular, as the hydraulics failure was caused by unrelated maintenance work, the chain of causation from the first breakdown (port engine failure) had been broken. Owners, on the other hand, argued that the initial port engine failure remained an operative and continuing cause for the entire period of off-hire.

Blair J analysed the facts at length and ultimately decided that on a practical approach, as “one thing led to another”, the three machinery breakdowns could not be separated.

As the question of causation in this case was heavily factual, the Court of Appeal hesitated to differ from Blair J. Despite expressing discomfort with Blair J’s sparse reasoning, the Court of Appeal agreed that “the hydraulics failure was simply an incidental vicissitude of the events set in train by the [port motor] breakdown.” Tomlinson LJ derived comfort from Blair J’s finding of fact that if the first breakdown had not occurred, the motor would not have been removed and the maintenance work never executed.

Comment

In relation to unrelated repairs or surveys being executed concurrently with repairs arising from an insured event, The “Toisa Pisces” makes it clear that insurers wishing to enjoy credit for the time/cost saved thereby should include express wording to that effect in the policy. Such wording may refer to “ultimate net loss” or “credit”. In the absence of such wording, insofar as the unrelated repairs or surveys do not incur additional cost or time, no credit will be granted.

In relation to causation, it may appear that The “Toisa Pisces” was overly favorable to the assured. Blair J’s reasoning on causation was simply that “one thing led to another” and the Court of Appeal was hesitant to interfere with the fact-heavy enquiry. However, the unrelated maintenance works were to rectify an oil leak in a cooler which was not in use and these repairs would have never been carried out had the initial port engine failure not occurred, since they could best be done only after the engines had been removed. The “Toisa Pisces” should not, therefore, be taken as authority for any looser or wider understanding of the causative effect of an insured event than that set out by the established authorities.